Mortgage Modifications Daunting for Homeowners

Laverl "Nick" Nicholson used to look out of his kitchen window at the weeping willows that mark the burial place of two of his daughters. Then a debilitating car wreck left him unable to pay the $220,000 he owed on his northwestern Montana home.

He tried for a year and a half to lower his mortgage payments through a loan modification, but the government-insured loan that he took out three years ago came with restrictions. The best the bank could offer him was a reduction of $124 per month, leaving Nicholson with a $1,585 payment that he still couldn't afford.

The bank foreclosed last April, forcing him to move next door into a mobile home on two of the original property's 10 acres that he had given his daughter a few years before.

Despite the government's push to forestall foreclosures through mortgage modifications, situations like Nicholson's have become common. Loan modifications often don't work out because the homeowner doesn't understand what's out there, the lender is reluctant to write off part of the loan or, as in this case, the terms of a government-back loan limit what the bank can offer a borrower.

Today, the house near the small town of Thompson Falls is being sold in a sealed-bid process by the Department of Housing and Urban Development. The asking price: $87,000.
Nicholson, 50, is galled to see something so dear being advertised so cheaply.

"I've been a blue-collar worker all my life and I worked hard for what I had. For it to be thrown back out there for this price and our family not given first option...," Nicholson paused. "Things aren't supposed to be this way in America. A man isn't supposed to lose his home for $220,000 only to sell it again for $87,000."

Nicholson, like many Americans, was drawn to a Federal Housing Administration loan to refinance his home because it offered good terms like a 3.5 percent down payment. He used the $268,000 he borrowed against his home to invest in his business as a sawmill maintenance contractor working in the Northwest and across the country.

But with the car accident in 2008 that broke two vertebrae in his neck and a pre-existing degenerative disc disease in his back, he became unable to work. He began to miss mortgage payments, and the agency that bonded his business discovered his delinquency, causing him to lose his bond and his business.

Foreclosure proceedings began and it became necessary for Nicholson to seek mortgage relief, but the FHA-loan modification terms were limited. Loan servicer Wells Fargo was only able to offer him a 5.375 percent interest rate, the going market rate, and unlike non-FHA loans, his terms could only be extended 30 years instead of 40 years.

The offer would have dropped Nicholson's payments from $1,709 to $1,585.71. He asked for additional relief that would have lowered his payments to under $1,000 a month. He was denied.

"I'm lost. I'm a mechanical-type individual," Nicholson said. "My knowledge in this field is not good. So I'm going on what I've been told."

"We worked for more than a year in an effort to prevent the foreclosure. Under the guidelines available under FHA we were unable to find an option that would let him stay in the home at a price he could afford," Goyda said. "At that point, there were no other options left for modification."

Wells Fargo had previously sold Nicholson's mortgage through Ginnie Mae, the Government National Mortgage Association, to an investor that buys those securities, such as a mutual fund or a pension fund. When the house went into foreclosure, Wells Fargo bought back the loan to pay the investor the unpaid balance.

The bank filed a claim with the FHA, which provides insurance on loans made by approved lenders. FHA reimbursed Wells Fargo for the $220,000 unpaid principal and approved expenses.

That left the federal government to unload the house for about a third of Nicholson's unpaid principal.

"Who's going to eat the difference between $220,000 and $87,000?" said Julie Hope, a counselor for NeighborWorks Montana, a nonprofit housing group helping Nicholson. "The lender's out of it because they've turned in their claim on it and gotten their money."

FHA says it's costing the taxpayers nothing because the money used to pay the claims comes from the mortgage insurance payments by the homeowners who borrow under the program.

FHA paid about $12.8 billion on nearly 100,000 such claims on foreclosed homes in 2010, an average of $128,000 per claim, said Department of Housing and Urban Development spokesman Lemar Wooley.

The year before, FHA paid 70,000 claims at an average cost of about $117,000, for a total of nearly $8.2 billion.

The loans have become very popular in the last four years, up from 2 percent of the mortgage industry's volume in 2006 to about 30 percent today.

FHA loans have a lower foreclosure rate than non-FHA loans. At the end of the third fiscal quarter of 2010, the foreclosure rate for all loans was 4.39 percent compared to 3.32 percent for FHA loans, Wooley said, citing Mortgage Bankers Association delinquency data.

Wooley said banks can't simply foreclose on a person with an FHA loan to save themselves the hassle and possible monetary loss of a loan modification. FHA-approved lenders are required to try to help the borrowers avoid foreclosure or they face penalties, he said.

"Lenders that do not engage in loss mitigation and are paid a claim by HUD are subject to administrative action, including penalties in the amount of three times the amount of the claim paid to that lender," Wooley said.

But that doesn't make it any easier for borrowers like Nicholson trying to wade through their options with a foreclosure deadline hanging over them.

"We encourage borrowers in distress to get in touch with a HUD-approved counseling agency as soon as possible in the process," said Marietta Rodriguez, NeighborWorks America's national director for home ownership and lending.

Nicholson and NeighborWorks are investigating whether he has a viable wrongful foreclosure claim, but he said primarily wants to get word out as a warning to others who also may be teetering on the brink of bankruptcy.

He hopes, though, that he might see his daughter and her husband one day move into the home where she grew up.

"I would never move back into the home, but it would be nice to have my children near me. Eventually my health is going to give out and I'll be in a wheelchair. It would be nice to have them nearby to help," he said.

Laverl Nick Nicholson used to look out of his kitchen window at the weeping willows that mark the burial place of two of his daughters. Then a debilitating car wreck left him unable to pay the $220,000 he owed on his northwestern Montana home.
He tried for a year and a...